Q3 2023 Starwood Property Trust Inc Earnings Call

Participants

Barry Stuart Sternlicht; CEO & Non-Independent Executive Chairman of the Board; Starwood Property Trust, Inc.

Jeffrey F. DiModica; President & MD; Starwood Property Trust, Inc.

Rina Paniry; CFO, Treasurer, Principal Financial Officer & CAO; Starwood Property Trust, Inc.

Sean Murdock; Co-President of Starwood Infrastructure Finance - Starwood Property Trust; Starwood Property Trust, Inc.

Zachary Tanenbaum; MD & Head of Investor Strategy; Starwood Property Trust, Inc.

Donald James Fandetti; Senior Analyst; Wells Fargo Securities, LLC, Research Division

Jade Joseph Rahmani; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Sarah Barcomb; VP & and Commercial Mortgage REITs Analyst; BTIG, LLC, Research Division

Stephen Albert Laws; Research Analyst; Raymond James & Associates, Inc., Research Division

Presentation

Operator

Greetings. Welcome to Starwood Property Trust's Third Quarter 2023 Earnings Call. (Operator Instructions) Please note this conference is being recorded. At this time, I'll hand the conference over to Zach Tanenbaum, Director of Investor Relations. Zach, you may now begin.

Zachary Tanenbaum

Thank you, operator. Good morning, and welcome to the Starwood Property Trust Earnings Call. This morning, the company released its financial results for the quarter ended September 30, 2023. Filed it's form 10-Q with the securities and exchange commission and posted its earnings supplement to its website. These documents are available in the Investor Relations section of the company's website at www.starwoodpropertytrust.com.
Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.
The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer; Jeff DiModica, the company's President; and Rina Paniry, the company's Chief Financial Officer.
With that, I'm now going to turn the call over to Rina.

Rina Paniry

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings or DE of $158 million or $0.49 per share. GAAP net income was $47 million or $0.15 per share. GAAP book value per share ended the quarter at $20.18 with undepreciated book value at $21.15. These book value metrics include $404 million or $1.29 per share of reserves related to our CRE and infrastructure lending businesses, including $15.8 billion of commercial loans, $2.3 billion of infrastructure loans, and $535 million of combined REO.
Beginning my segment discussion this morning is Commercial and Residential Lending, which contributed DE of $207 million to the quarter or $0.64 per share. In commercial lending, we had $762 million of repayments during the quarter, which outpaced fundings of $263 million. Subsequent to quarter end, we collected another $331 million in repayments. This includes $52 million from a non-accrual loan on a retail and entertainment asset in New Jersey, which represents 90% of the retail exposure in our loan portfolio. Because the loan is on cost recovery, any cash received is used to reduce basis.
Our portfolio of predominantly senior secured first mortgage loans ended the quarter at $15.8 billion with a weighted average risk rating of 2.9. Of the $600 million balance decline from prior quarter, $160 million was due to foreign currency fluctuations. This was offset by the FX impact of our foreign denominated debt as well as our FX hedges which together had unrealized gains totaling $153 million. As a reminder, we hedged 100% of our expected cash flow exposure on non-USD loans, including both projected principal and interest.
Turning to CECL. We have previously discussed the third-party software we use to model our CECL reserves. That model, in turn, utilizes macroeconomic advisers for purposes of determining the economic outlook. In running our third-party model this quarter, we selected a more pessimistic outlook for our office loans, which increased our general reserve by $51 million, bringing our total reserve to $280 million, of which $177 million relates to U.S. office.
When looking at our loan reserves, it is important to look beyond just our CECL reserve. Some of our loans have been moved to REO, while some loans that are still on balance sheet have reported charge-offs. Neither of these appear in our GAAP CECL reserve, although both have already been reflected as a reduction to book value. When we include these components, our commercial lending reserves are 2.24% of our lending portfolio, which is at the median of our peers despite our low office exposure.
During the quarter, we placed one new loan on non-accrual, a $61 million mortgage and mezzanine loan on a multifamily property in Portland, Oregon, which Jeff will discuss. As of quarter end, our nonaccrual loans and REO represented less than 4% of our total assets.
Next, I will discuss our residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.5 billion, including $873 million of agency loans. We continue to be patient while the loans and has held to maturity portfolio repay. Despite our GAAP mark, these loans continue to prepay at par. We received $66 million of par repayments during the quarter and $180 million year-to-date. Lower prepaid speeds continued to benefit our retained RMBS portfolio, which ended the quarter at $451 million. As a reminder, we fully hedged the interest rate exposure in this portfolio with our hedges having a positive mark of $196 million at quarter end after $25 million of cash received in the quarter.
Next, I will discuss our Property segment, which contributed $23 million of DE or $0.07 per share to the quarter. Of this amount, $14 million came from our Florida affordable housing fund, where we rolled out the HUD maximum allowed rent level discussed last quarter. A change in HUD max rent calculation this year resulted in 3.8% of rent growth being deferred to 2024. This portfolio is 3.7% blended fixed and floating rate debt with just under 4 years of average remaining duration continues to be an asset and gives us ample time to wait for an opportune time to extend the debt in the coming years.
Turning to Investing and Servicing. This segment contributed DE of $16 million or $0.05 per share to the quarter. In our special servicer, our active servicing portfolio increased from $5.7 billion to $6.1 billion. We continue to see loans transfer into servicing with $700 million of new loan transfers this quarter, nearly 2/3 of which were office. Our named servicing portfolio declined to $101 billion in the quarter with new assignments of $2.4 billion, offset by $3 billion in maturities.
In our conduit, Starwood Mortgage Capital, we completed 2 securitizations totaling $63 million at profits consistent with historic levels. We expect to see higher volumes from this business in the fourth quarter and into 2024, as loan maturities pick up. And on the segment's property portfolio, we sold 2 assets in the quarter for a total of $35 million in proceeds, resulting in a net GAAP gain of $11 million and a net DE gain of $6 million.
Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $9 million or $0.03 per share to the quarter. The majority of our investing this quarter was in this segment, where we entered into $444 million of new loan commitments. Fundings on these new loans of $351 million outpaced repayments of $265 million, bringing the portfolio up slightly from last quarter to $2.3 billion. On the CECL front, we charged off $11 million of our specific reserve related to a legacy GE investment that we discussed last quarter which resulted in a corresponding CE loss.
I will conclude this morning with a few comments about our liquidity and capitalization. Our liquidity position remains strong at $1.1 billion after the $300 million repayment of our unsecured notes at maturity on November 1. This does not include liquidity that could be generated through sales of our assets in our Property segment or debt capacity that we have via our unencumbered assets and Term Loan B. As a reminder, 83% of our total outstanding on and off-balance sheet debt is non-mark-to-market, as is 91% of our commercial lending debt. With the repayment of our unsecured notes last week, we now have no corporate debt maturities. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.42x at quarter end, or 2.37x after the repayment of our unsecured notes.
With that, I'll turn the call over to Jeff.

Jeffrey F. DiModica

Thanks, Rina. We've maintained very low leverage at just 2.4x today and invested in every quarter since our inception, including $650 million this quarter and $2.7 billion in the last 12 months. This quarter's originations were across business segments, but primarily in our very accretive low loan-to-value energy Infrastructure Lending segment with expected returns in the high teens.
Despite higher interest rates today, many of our borrowers continue to execute their business plans and loan repayments have continued to outpace our conservative expectations this year, giving us significant capital to accelerate our investing pace and/or continue to build our liquidity.
Rina mentioned, we are sitting on near-record cash today. Due to the accordion nature of our bank warehouse lines, we are able to delever our balance sheet with excess cash by paying these lines down, reducing our interest expense by an average of SOFR plus 260 basis points today. This means for the first time in our history, we are saving and thus earning 8% on cash balances. When LIBOR was 25 basis points, we earned less than 3% on our cash, which created significant earnings drag if we didn't reinvest excess liquidity immediately. Earning an incremental 5% on our cash allows us to conservatively bolster our balance sheet with more cash in today's volatile interest rate environment while creating very little earnings drag.
We have $1.6 billion in loans financed today on bank lines at SOFR plus 275 basis points or higher. And as I've explained in the past, this relatively expensive bank debt is potentially an asset of the firm. As it sets us up to opportunistically replace that secured debt with unsecured debt in the future, should our unsecured borrowing spreads normalize to historic averages. We would then replace secured debt with unsecured bonds at little or no cost. Creating more unsecured debt as a percentage of total leverage at our company is a key metric, along with our already low leverage in achieving our long-term goal of receiving an investment-grade bond rating.
As I mentioned, we were busy in our Energy Infrastructure Finance business this quarter, committing to $444 million of new investments with a high teens return on equity. We continue to believe this low loan-to-value business is our most accretive opportunity today and expect to continue to see outsized growth in this business line in the coming year. Massive demand for power and lack of competition for financing gas-fired power plants and midstream gas transmission and storage assets has allowed us to earn higher unlevered yields on better credits with better structures.
Our asset spreads have increased, but our financing spreads have not risen in line with our other businesses, thus creating even more accretive levered returns for shareholders today. Our post General Electric acquisition portfolio now makes up almost 90% of our SIF portfolio with a high-teens levered return and no realized losses to date.
In commercial lending, our 5-rated loans decreased by 27% to $555 million or 2% of assets in the quarter. and our 4-rated loans increased by $284 million to $987 million or 3.6% of assets, primarily due to the upgrade of the retail and entertainment loan in New Jersey that Rina mentioned, paid down by $52 million in October.
We downgraded a $61 million multifamily loan in Portland to a 5 in anticipation of our taking control for a UCC foreclosure on the asset. At which time we plan to sell the property at our basis to an unrelated third party.
We also downgraded a $118 million office loan in California from a 3 to a 4 as the loan went into payment default at the end of the quarter. This asset is 75% leased and produces almost 7% debt yield today with a rapidly growing $50 billion market cap tenant expanding into 1/3 of the space and potentially more in the future. We are finalizing negotiations with the sponsor to give the asset runway to fund accretive leasing through 2024. Office remains our industry's most challenged asset class. We are happy to have cut our office exposure in half over the last few years with loans on U.S. office comprising just 10.5% of our assets today.
Following the repayment at par of 2 B-quality office loans in Midtown Manhattan in the quarter, we now have no loan exposure to Manhattan office and no loan exposure to any asset class in San Francisco. 85% of our CRE loans have interest rate caps in place or our fixed rate loans, not affected by rate increases and another 6% of interest reserves or guarantees. So we have interest rate protection on 91% of our CRE loans today. Since COVID, we reduced our exposure to construction loans and therefore, to future funding obligations.
Construction loans now comprise less than 10% of our funded loan book the lowest in over 10 years. Pro forma for a senior loan payoff we expect in Q4, this decrease has reduced our future funding obligations on both construction and nonconstruction loans to just 4% of assets. Having less future funding exposure and over a year until our next corporate debt maturity allows us to wait for the most opportune time to raise capital in the coming years should we choose to go more aggressively on offense.
In our residential lending business, we were able to offset lower prices on our loan book due to the rising rates with gains in our rate hedges and in the value of securities held from previous securitizations which have outperformed its prepaid piece has gone down. In the quarter we executed on our plan to move over $2 billion in residential loan collateral financed on bank lines to other money center banks, leaving us no regional bank counterparties, extending our facility duration, increasing potential advance rates and most importantly, significantly lowering our borrowing spreads and costs.
Finally, this quarter in our REIT business, we are launching a third-party services business, we will call Starwood Solutions. This team will solicit and execute on third-party fee-based services, including individual asset or portfolio valuations, restructuring and balance sheet consulting, collateral management and surveillance, underwriting and due diligence for equity portfolios, loan portfolios or securitizations and a full spectrum of capital markets and investment consulting services.
Starwood Solutions will partner with our 200-plus professional team at REIT that together have worked out over 7,000 loans totaling $88 billion in value over the 32 years they've been in this business. We are working with broker partners and engaging directly with CRE asset owners to provide these high value-add services that we expect will create high multiple fee-based revenue for Starwood Property Trust shareholders in the future.
There has never been a better time to launch this vertical, one we hope will become our eighth business line. We are keen to continue to add fee-based business lines as a real estate investment and services business that continue to pull us away from a price-to-book valuation methodology. I would love to introduce anyone listening, brokers, owners, lenders and consultants to our team to discuss what we can do for you and your clients in more detail.
With that, I will turn the call to Barry.

Barry Stuart Sternlicht

Thank you, Jeff, Rina, and Zach, and good morning, everyone. Thanks for being with us. If I sound like I'm under the weather. I am home with COVID. So I might not be -- I'm not sure anyone would call me coherent before, but I might be less coherent that might normally be. I have just some quick comments on the real estate markets. The -- as you -- many of you know, I've been very critical of the fed for a number of reasons, but the key one was the economy was slowing on its own and the COVID stimulus package was being spent and the sales were being restocked, so there was no longer so -- too much money chasing too few goods.
Now you had less money and the shelves were full and you can see that by retail sales. What we missed in my forecast was the scale of the (inaudible) of spending packages of infrastructure bill, which has kept construction jobs flat, even though rates have risen 500 basis points, the delay in the travel business that supported the economy while other sectors kind of weakened the CHIPS Act, Inflation Reduction Act and of course, even the remaining money from the American Recovery Act have been enough to keep the public economy stronger while the private economy began to wilt.
And I do think, as I've been very vocal about that inflation is coming down. I think I've been saying that for months on TV, following the 1/3 of inflation comes through rents and rents were trending down, particularly in the apartment segment, which we have a (inaudible). So rents are still positive, but they're not running 10% and 20%, which they were running when the Fed missed it. but they're up at 3% or 4% today. And just the move of the current Fed numbers almost 7.7% for rents, it's coming down to 3%. Inflation falls below 2%, except for the wildcard of oil prices. And I think we're all sort of scratching our head with oil around $80 with the situation in the Middle East.
That's when you scratch your head and you cannot -- and you cannot forecast what might happen to inflation should there be disruptions to the oil supply. But I will say, in general, I think you've seen the top in rates. I think Powell and his crew are paying a little more attention to the delays in their own data, they actually mention it now. And actually, what's happened in the regional banking world, and the contraction of credit and the reduction of credit in the corporate world from the money center banks will have a significant impact, though it's delayed on this economy.
So I think you have seen the top of rates you saw this rapid move 40 basis points in the 10-year just last week, that supports the real estate complex. And again, I'd say that real estate is the unintended consequence of a fight that is fighting. We didn't -- he's after inflation, but he's crushing other industries that are material to the U.S. government like real estate where significant capital gains help fuel the revenues to offset the increased interest expense of spending all this money on our $33 trillion of debt.
So I also said the government really can't afford 5%, almost $10 trillion of our $33 trillion of debt rolls in the next 12 months. I think it's slightly more than that, it's like 1/3. So you have a $500 billion interest bill coming in very soon. And the current interest expense in the budget is absurdly low.
It will climb probably closer to $1 trillion if he doesn't relent. And again, I just endure people who compare what he's doing to Volcker. Volcker had almost a negligible deficit. He operated with a $200 billion number -- $33 trillion deficit. All this is important because it forms the framework of what we're doing and what the opportunity set is for us going forward.
So 1 thing that's happened, of course, and 1 more thing about the deficit, the largest delta to the budget of February, March of this year when they just announced the deficit, it would be $2 trillion, not $1.3 trillion was the decline in receipts. There's $170 billion miss by the COB, which is amazing because if I had to -- if our guys were off by 40% on a number, I don't think they'd have their jobs. We are applauding this guy and he doesn't seem to be realizing what he's doing to the other side of the deficit equation, which is the revenue side.
Obviously, they sold down their book. That created a $91 billion variance to their original forecast for the deficit. And then the $171 billion in receipts, interest expense was like $100 billion off. So he was off -- he knew what he was doing, but they didn't forecast it properly. Anyway, what that led to is a dramatic reduction in transactions, corporate M&A, everything is down. Real estate transactions are way down 60%, 65%. That limits the number of opportunities we have to deploy capital in other players in our field. But what's more interesting, of course, is that the regional banks, which have loaded up on [$1.9] trillion of real estate debt and the money center banks are getting tremendous pressure from the OCC and Powell Federal Reserve group, the FDIC to reduce their exposure to real estate.
That has left us with probably one of the best lending environments maybe the best lending environment since we started this firm back in 2009 in the GFC, again, when there was no credit. So there are really remarkable opportunities for private credit, and we hope that Starwood can position itself as the preeminent private lender in this space going forward, much of the way other alternative managers have taken advantage of -- and the market seems to enjoy their position in corporate credit. We want to be the guy in real estate credit. So we are working to make sure that our engines are going and we're fine-tuning our team and hope to come out of this, what I call it kind of like the cars on the -- what we call when the cars going around the racetrack, the flag is out, and you're trying to figure out like when it's safe to get back on the track and drive full speed.
I do think we're very well positioned for full speed. A lot of our business lines are kind of a sweep. The conduit business only did 2 securitizations. There just aren't a lot of transactions to do. We have a bunch of REO that's not producing any cash, but there's significant value there and as the markets recover, including our largest loans in those books as we can redeploy that capital, which is not our earnings, that will be accretive to the company. Jeff mentioned how accretive or not dilutive, it is for us to build up cash and pay off lines earning by 8% of our cash because we're paying off lines. And it is true today that the only lender for many of these assets is the existing lender. So a lot of borrowers are just working with their existing lenders, which limits the opportunity set for new capital to come in and deploy capital at these extremely favorable spreads and rates.
And I think the first thing people talk about the reduction of rates, and we'll all follow what happens I think the forward curve is good. I mean it's favorable, rates should come down, but I would guess that the curve is long and rates will come down further because I don't think you'll have a 300 basis point real interest rate because the economy can't stand it and neither can the global markets. The market is too fragile. There's no real engine of growth worldwide right now pulling the global economy up other than maybe defense spending, which is a sad comment.
So I think when you see rates that are peaked, you'll see spreads come in, and that will be a double whammy. So rates will come down. it's sort of an unnatural world for AAAs to be 250 over 240 over in some asset classes at 180, but they used to be 80. So you should see when fear dissipates and we're on the backside of this you'll see both base rates come down and spreads come down, which means you really want to be a lender today, if you can.
And hopefully, we'll be in a position to go more on offense next year. but we are being careful because it is a minefield out there, there are a lot of situations today out in the marketplace where you can see there could be trouble and we just want to be careful. We're here for stability and the consistency of our distributions and transparency, which we've gone from the start of this company 13 years ago.
So -- and I'm really excited to finally get into Starwood Solutions business long ago, a small firm name BlackRock created a credit software package to help them manage their book and exposures that became BlackRock Solutions, and they built that into -- last I looked about $0.5 billion EBITDA business.
We do many things that banks do, but don't do that well and other people, which is workouts. And L&R being the one or second largest special service in the nation has a large dedicated team with huge experience backed by a massive database and technology-powered database that helps it and maximize value of real estate assets. So we are going to expand that business, dedicated researches to it. It's incredibly high ROE. Obviously, ROI, there's no invested capital. It just fee streams off of the intellectual capital of our business. And I would hope that become, over time, a meaningful new business line for the firm.
And last, I mean, I want to talk quickly about the question I get every time I speak about anything today is U.S. office. U.S. office is clearly bifurcated.
New ESG-compliant, great buildings are full and holding their rents and everything else has struggled. And there is leasing volume. It's not like there's none in the United States, so the net -- there's no net new absorption. But in general, these real estate markets are not an issue. There's some overbuilding of multis and downtowns in certain markets that will pass. Obviously, the good news for multis and the construction as people can't buy homes, either not being built, but they can't afford them, (inaudible) 50-year olds in homes. So even though apartment rents are slowing, I would expect they would reaccelerate over the coming 24 months supporting that asset class and everything in the residential asset class.
So hotels continue to hold their own shockingly. And now they're full with their employees. They hired everyone back that they didn't have some margins are normalized, I would expect the leisure travel to weekend it already is in the United States, not so much so in Europe yet, but we have a good margin of safety, and we've had some of our hotel loans paid off. And one other comment, and then I'll stop, which is future funding.
One of the things that sort of worries me is when we don't have the liquidity we want it for loans repaying, but we have commitments on future funding. And that's among the lowest it's ever been in our firm's history. So I think we've set up ourselves to succeed going forward, and the team is locked in and doing a job and I'm thanking the Board again for their gracious support and advice since we navigate these choppy waters.
So with that, I hope I'm going to stop and thank everyone for listening, and we'll take questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question is from the line of Stephen Laws with Raymond James.

Stephen Albert Laws

First off, Barry, I hope you feel better soon. I hate to hear about the -- under the weather. To follow up on your last comment, can you touch base on office, I thought a follow-up more detail on office. I thought it was notable, no exposure now to Manhattan office and no exposure at all to San Francisco. Are there certain marquee assets or Class A assets that you would look to do loans with an office? Or you feel other opportunities better to put capital to work? And sort of along that front, how is office potentially going to be disrupted around the WeWork filing for bankruptcy?

Barry Stuart Sternlicht

Well I'll do WeWork then you do the rest of it. We work at a profitable business underneath the business. They just have too many sites than they need so -- I mean they were -- they got hit with a one-two punch, right? The -- they were recovering nicely, gaining enormous market share of (inaudible) space and then the pandemic hit and that kind of really hurt them. And they didn't have -- they never had the right capital structure and SoftBank was very reluctant to support the company and increasing the cost of debt and interest rates rose, of course, they were the only lender to save the company, and they kind of (inaudible) just kind of wanted to wash the hands of the thing. But there is a real viable business that a shared office space business is a real business, and we work as a global brand. .
So my guess is they will reorganize and they will come out as a profitable entity, much smaller than they went in. They're just getting rid of unprofitable leases and -- but -- so the impact on the office markets like New York will not be good. I think I've read they're giving back 30 or 40 spots. But WeWork will, I guess, survive certainly without debt, they can in a profitable company, and they'll have to figure out the right overhead levels for a company that's not in hypergrowth because even though they cut them hard, they probably have to cut them even harder. So that's WeWork. And on office, Jeff, do you want to give your thoughts and then I'll see if I have any different thoughts obviously, not next year so.

Jeffrey F. DiModica

Absolutely. Let me touch on WeWork a little bit more for a second. We don't know which leases will be given back out of the 20 million square feet. There are (inaudible) would say that it won't affect leases outside the U.S., obviously, we're not sure how that plays out. We do have 4 assets that have exposure. WeWork represents 1.2% of our total office square footage and less than 1% if you exclude a Dublin lease, that's 100% occupied by TikTok.
That number becomes less than 0.5% if you take out a Southern California asset where we have a $4 million letter of credit that covers rent through exploration. And of that 0.5%, more than half of that is a Berlin asset that they brought current just this week. So them bringing the current just this week tells us they likely plan to stay, leaving us 1 asset in D.C. where 9% of the building is WeWork. So we feel really good about what our exposure looks like here. We never really leaned in on lending to WeWork occupied buildings. So we feel pretty good about that.
As far as office, you guys know there has been a massive bifurcation between Class A and Class B. The best buildings are leasing. They're leasing at incredible rents and the weaker buildings are not going to see that kind of rental growth going forward. So we will look at high-quality Class A office buildings Class B lease up.
As I mentioned, we got out of 2 Class B office buildings. That won't be the case for a lot of Midtown Manhattan Class B office buildings with the tenant improvements and leasing commissions and money you have to put in on these assets, the net effect of rents after free rent just do not cover you in a lot of different scenarios and a lot are not able to be converted.
So Barry, I'll hand it to you if you have anything different to say on the office side.

Barry Stuart Sternlicht

Well, the office market reminds me of the retail market when malls were all going bankrupt and obviously, they didn't all go bankrupt and Simon recently reported with real same-store sales growth. So the capital markets dry up for an asset class. And obviously, office is a 4-letter word, much like a mall or retail was a couple of years ago. So it is unbelievable opportunity set loans on office buildings today, 9%, 10%, 11%.
And that's 1 of the problems, if you're borrowing at 9%, 10%, 11%, what's the cap rate on the office even a good one? So if you have a trophy building, and it's well leased, it's really about the stability of the cash flow stream, the rollover schedule. You probably would want to do anything that was full today and had an opportunity to roll (inaudible) but I think we look favorably with low leverage on some trophy office buildings in major markets that had great credit profiles, because we're going to get probably the best returns of any loan we can make. And we'll just use our equity real estate underwriting skills to make sure we feel comfortable about that real estate in that market.
And we -- it's interesting what you see in our book. I mean we've had sort of great assets with, I'd say, not overly well-capitalized borrowers, then we have great assets with great borrowers. Household names, the largest -- we're the -- I think, the third largest real estate player in the opportunity set that we compete in. And all of us are getting back buildings. And why are we doing that to lenders. We're doing that because if you're in San Francisco, which we're not, you have a 30% pus vacancy rate. You don't know what the lease rent is going to be then you actually lease, but you also don't know what the TI package is.
And if you're the borrower, now you're looking at the building and say, I got to put another $50 million. I have $50 million and they got to put $50 million to retenant debt, and may they have to pay down the existing loan, and you're just really nervous about when you look at the exit cap you need in order to justify putting that capital and get a return on it. And that equation is still murky.
So again, as rates fall, will 6s and 7s and 8s return even 5 to best office building in the United States. My guess is they will at some point. In Europe, you're already there. In Europe, we're where rates are lower in Germany with a 10 years to 80. The office markets are fairly full and rents are actually rising. So -- but even there, where there are some great markets, offices still in the investing world a 4-letter word or if it's like not a 4-letter word, but it's close to it.
And so I think at the moment, all the press, and it will have to play out. You'll have to see it play out. But I think there'll be really good opportunities for smart investors to pick off very good leverage returns in the space going we wouldn't put a red circle around it if that was the question. We won't not lent to office. And when everybody runs away, that's -- I think it was David Bonderman had said, "When there are tanks rolling down the street is when he wants to invest." I'm not sure we're the tank down the street, but for office, we probably are. And we're not -- we'll have explain every office (inaudible) we make to you. So we'll have to have a very thin (inaudible) in order to make those -- in order to make an office loan. But I wouldn't say never. I'd say at the moment, it's not really our top choice of things to invest in, but not never.

Operator

Our next question come from the line of Sarah Barcomb with BTIG.

Sarah Barcomb

Maybe to just pivot from office to multifamily for a second. On last quarter's call, you spoke to a sort of breakeven cap rate on the multifamily book of about 6.5% and a willingness to take over those assets at, say, $0.65 on the dollar where sponsors walk away. I was curious if you could provide some updated thoughts there, just given the forward curve has come up since then, we've heard Powell reiterate that he's not thinking about rate cuts yet. Also just curious where the debt yields are looking on for those assets.

Jeffrey F. DiModica

Barry, do you want to start?

Barry Stuart Sternlicht

Yes. There's probably no -- it's interesting, as you think about 30 years of doing this, capital flows sometimes are overwhelmed fundamentals. And the rent growth is slowing and in some markets like Austin, they're negative. For apartments, the asset class is definitely going to be a favorite for institutional investors going forward. You can't take a $3 trillion office class -- asset class like office. Shut it off from an investment and the real estate capital is going to have to go somewhere.
And hotels are kind of bought for (inaudible) for a lot of institutions. So retail, maybe -- I mean nobody is rushing to do tons of retail deals today, even though the markets are relatively healthy.
Industrial, possibly, it's a bond and the economy was slow. So rents will come down and the pace of rent increases are coming down also in industrial. So I think multis benefit and that was why the comment was we'd be happy to take assets back, and we are taking one back and selling it immediately, it looks like someone in Portland on one of our troubled multis. But I think in general, what we said before is true, I -- we will make more money in my view, if we can take these assets back, and we will just staying as a lender, though we will stay as a lender, that's our primary job.
So if we're, in fact, at 65% of value or 65% of construction costs or 65% of the renovation, totally renovation cost, city-by-city, but I look at that as sort of an opportunity and not a bad thing. They are -- they're not going to be empty. We took back an office building in D.C. It's an interesting building. We have it on our books. It was bought by a household name. They emptied the building, reskinned the building and then realize that the amount of capital they have to put into retenant the building justify them walking away from $100 million of equity. That deal is empty.
So that's a drag. Any multis we get back are partially full and probably yielding 5, 3 quarter or 6. So not terrible. And if we like the assets, which hopefully we do, we lent against them, this should be good opportunities for us going forward.

Jeffrey F. DiModica

Yes, Barry, I don't have much to add. I did make those comments about our breakeven cap rate being around 6.5%. As I look at our portfolio, our in-place debt yields are mid-6s today, and we expect they'll stabilize significantly higher than that. But obviously, as Sarah, as you mentioned, the forward curve has gone up. So a lot of this is going to depend on what does the forward curve look like a year out in a year if people are faced with the refinance. Will they make the decision to hold on or not?
And I think that decision to hold on will be mostly about liquidity. I think that people will think that they're going to have an opportunity at a lower cap rate in the future to be able to sell it. And will they be able to hold on? Will they have the cash flow available to buy a cap and wait it out. We obviously do. We will support the assets. As Barry said, the have debt yields that almost -- that would almost cover today even on the lowest debt yield assets, it would not cost us a lot to stay in those assets and for the right to own them at 65% of cost. And wait for a better environment to either refinance them or to sell them. I think that's something that would be a great investment for us, and we would do that in defense.

Operator

Our next questions come from the line of Don Fandetti with Wells Fargo.

Donald James Fandetti

Yes, Jeff should we expect continued growth in Infrastructure Lending relative to CRE. And also, can you talk about the competitive dynamic in infrastructure and how those assets would perform if we did go into a recession?

Jeffrey F. DiModica

Sean (inaudible) -- Sean is sitting next to me. We do expect to add continued growth here and we think it's tremendously attractive as I was saying before. Where I started was -- to say that our asset spreads what we're earning have gone up -- commensurate with what our asset spreads have gone up in other asset classes like CRE lending. The liability side hasn't increased by as much. The banks aren't retrenching the way that they're retrenching in CRE. So we're able to earn sort of the highest yields that we've had in a while. A couple of other headwinds -- tailwinds, excuse me, global power demand is going up massively, and it could double or triple in the next 15 years or the estimates that you see. So the power plants that we have that start off with a low loan-to-value generally deleverage over the life of the loan, they're going to be worth more, not less.
I think the transition to a more ESG, solar, wind, et cetera, world is going to take a lot longer last quarter, I talked about the fact that even if it doubles every year, it still will get to low 20% of total energy demand in the next 10 or 12 years. So the rest has to be done somewhere. The traditional markets are not there in depth to finance the power plant assets in midstream storage and transmission assets.
We believe that this transition is going to take a lot longer. It's going to be a great opportunity. And the structural nature of these assets where we get significant amount of deleveraging over the life end up at [$8] per kilowatt that feels really cheap on the role, makes this a super attractive asset class for Sean Murdock, is sitting next to me, Sean, anything to add to that?

Sean Murdock

Not really, Jeff. The only thing I'd add is just the -- Jeff's view of the energy transition, it's going to take longer. Banks have decided with their lending strategies that's going to come sooner if it hasn't already come. So I think that's where we get the tailwinds in this sort of market for putting new loans out most banks have decided the transitions happened and they've reduced their lending to traditional energy assets.

Barry Stuart Sternlicht

Just I want to go backwards just on one thing. Let's talk about multis, the key is that the wave of construction will be over next year and construction starts from multis have dropped to 250,000 from 600,000 or so. So that should bode really well for rental growth going forward. So we -- real estate is a long-term game. Also, construction is in the downtown. It's not in the downtown (inaudible) so much. So it's pretty concentrated. You understand a lot of these deals were built for a different rate environment. So there will be a lot of opportunity, I think, to take advantage of that if you're a long-term player and you have the capital to do so.
I think we have both and then on infrastructure, yes, I mean infrastructure has been our highest returning asset class. So yes, we will continue to -- 90% of our book, as mentioned, is post acquisition of the GE business. So the team is intact and finding great stuff to do, and a lot of our investments are behind that platform right now. Safer, safer place to be.

Operator

Next question is from the line of Jade Rahmani with KBW.

Jade Joseph Rahmani

Good to hear the comments around Starwood Solutions. I was worrying that Starwood might miss this moment. But the banks, we estimate their CECL reserves and NPL ratios are 1.5% to 2.5%. And which on their balances of CRE loans is massive and are still increasing, up 25 to 90 basis points per quarter. do you see working with the banks to special service assets as the biggest opportunity in front of the Starwood Solutions initiative?

Jeffrey F. DiModica

Yes, Jade, we would love to have the banks come to us. We're super fortunate to have this L&R business. As I mentioned on the prepared remarks, we have over 200 people who have done this for over 30 years and worked out $88 billion of assets. it could be the banks. Hopefully, the FDIC is listening and they give us a call. There are certainly lots of property owners, pensions, insurance, other investors, large players who could use our health.
The broker network that we use every day at Starwood Capital and have relationships with all the biggest brokers. They get asked to do reviews and portfolio valuations every day. they are not experts at working out assets. They are experts at buying and selling and financing assets, and we want to go to them and have them bring us the opportunities that they're seeing to both evaluate and help in work out.
We -- this is what we do, dealing with workouts between bespoke interactions between banks and clients or securitizations. We have experience in doing it all. And you're one of the people who pushed us over the last few years. So we appreciate that. We've now hired a team, and we think it's an extremely exciting opportunity and hope that people listening. Who are wondering about their portfolio valuations or asset valuations or what to do in a difficult time want to come to a shop that has done this 88 billion times over the last 30 years. So we think we have a lot of expertise to offer here, and we're really hopeful that we can grow this into something. You are right, the time is now.

Barry Stuart Sternlicht

Just a quick -- not everyone in our group has been with us 30 years. The head of the group...

Jeffrey F. DiModica

The group's been together for 30 years.

Barry Stuart Sternlicht

Yes. And we've been doing this 30 years. But -- and the guy who runs it, has been with actually 31 or 32 years. It is much like Guggenheim surge as the front end and for small insurance companies, we should be the back end for many regional banks and maybe some of the larger players like the FDIC, but we do have an incredible ability to do this.
I think they'll work in tandem, Jade. I think the increase in the name or the actual book that we have $101 billion or $102 billion in servicing -- I mean servicer that number is what's actually being REO or serviced by us, I think it's 7 or 8 today or 6 to 8, something like that, that number should go back up. I mean, you can see we're going to get a lot of business. It won't be as profitable as it was before to the CMBS securities, the loan documents have changed. They'll still be profitable. This could be bigger and that. So we'll get to work and give it a shot.

Jade Joseph Rahmani

And do you see, as a follow-up, M&A as an interesting deployment opportunity within this segment. There's many financials in the non-bank space that are under duress due to their capital structure and there could be fee income services businesses within that. We've seen others in my coverage such as Newmark grow in the servicing sector. And there's also the private brokers and maybe go over the rates that are (inaudible).

Barry Stuart Sternlicht

Send us their names.

Jeffrey F. DiModica

Anyone listening, please call us. We've got a (inaudible) The premium book value to our peers, obviously, it's accretive if we are able to consolidate the industry. We would love to consolidate the industry. We think we're well positioned to consolidate the industry. boards of directors who own a book value that they believe in more strongly than the market believes in or have been unwilling to date to date us, but we would love to go on a lot of dates if you have anyone listening to this call that would like to become part of Starwood.

Operator

Thank you. At this time, we have reached the end of the question-and-answer session. Now I'll hand the floor back to Mr. Sternlicht for closing remarks.

Barry Stuart Sternlicht

Thank you, everyone, for being with us, and good luck navigating these choppy waters. So hopefully, Powell -- Powell will take a vacation and the markets will get a bid. Thanks for being with us today, and hope none of you get COVID. Take care.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.